Indiana Law Review


Survey of Recent Developments in Health Law

Ice Miller LLP"

Introduction

This Survey summarizes recent developments in case law, legislation, and

administrative actions that affect the health care industry. It summarizes a wide

range of subjects including, among others, fraud and abuse, tax and
reimbursement, and payment issues. Although not an exhaustive review, this

Survey details the "hot" topics in the health care industry this year.

I. Fraud and Abuse

A. Stark III

On September 5, 2007, the Centers for Medicare and Medicaid Services
("CMS") published the Stark H Phase m ("Phase III") final rule in the Federal
Register} Phase HI does not create any new exceptions to the Stark Law;
however, Phase m provides interpretation of the existing statutory exceptions
and modifies some of the existing exceptions to the Stark Law.2

As a background, the Stark Law generally prohibits, absent qualifying for an
exception, a physician from making a referral to an entity for the furnishing of
any designated health services for which Medicare or Medicaid would otherwise
pay, if the physician or member of the physician's immediate family has a
financial relationship with that entity ("DHS entity").3 The Stark Law was
effective January 1 , 1 992, for clinical laboratory services ("Stark I")

4
and January

1, 1995, for ten other designated health services ("Stark II").
5

The Stark Law contains significant civil sanctions for violations, including
denial of payment, refunds of amounts collected in violation of the law, civil

money penalties of up to $15,000 for each offense, and exclusion from Medicare
or Medicaid programs.

6
In addition, if an individual enters into an arrangement

or scheme that the person knows has the principal purpose of assuring referrals
to an entity which, if the individual directly made to the entity would violate the
Stark Law, the person is subject to a civil money penalty of up to $100,000 for

* The following Ice Miller LLP attorneys contributed to the research and drafting of this
Article: Lisa Gethers, Taryn Smith, and Kevin Woodhouse.

1. Physicians' Referrals to Health Care Entities with Which They Have Financial

Relationships (Phase III), 72 Fed. Reg. 5 1,012 (Sept. 5, 2007) (to be codified at 42 C.F.R. pts. 41

1

& 424) [hereinafter Phase III].
2. See id.

3. 42 U.S.C. § 1395nn (2000 & Supp. V 2005).
4. Pub. L. No. 103-66, § 13562(b), 1993 U.S.C.C.A.N. (107 Stat.) 312, 604 (codified as

amended 42 U.S.C. § 1395nn).

5. Id.

6. 42 U.S.C. §1395nn(g).



1082 INDIANA LAW REVIEW [Vol. 41:1081

each such circumvention scheme.
7

The agencies responsible for implementing the regulatory provisions for the
Stark legislation are the CMS and the Office of the Inspector General ("OIG"). 8
CMS has been given the responsibility for developing regulations that set forth
the specific policies by which conduct prohibited by the Stark Law is defined,
while the OIG has maintained responsibility for imposing sanctions for violations
of Stark Law.

9 On March 3 1 , 1995, the OIG issued final sanction regulations for
the Stark Law, currently codified in 42 C.F.R. § 1003.

10
In such regulations, the

OIG incorporated the Omnibus Budget Reconciliation Act of 1 993 and the Social
Security Act of 1994 expansion to other designated health services into the final

regulations for sanctioning improper claims and circumvention schemes.
11 On

January 4, 2001, CMS published Phase I of the final Stark Law Regulations. 12
Phase I covers the general prohibition on certain referrals, the general exemption

to both ownership and compensation arrangement prohibition, and related

definitions.
13 On March 26, 2004, CMS published Phase II of the final Stark Law

Regulations.
14 The Phase II Rules became effective July 26, 2004.

15 On
September 5, 2007, CMS published Phase m of the final Stark Law
Regulations.

16
Phase III became effective December 4, 2007.

n A brief summary
of some of the interpretations and changes contained in Phase III are summarized
below.

1. "Stand in the Shoes Concept.

"

—In Phase III, CMS introduces a new
concept, the "stand in the shoes" concept.

18 Under this new concept, with respect
to indirect compensation arrangements, the relationship between a physician and

his or her physician organization is disregarded, and the physician "stands in the

shoes" of his or her physician organization.
19

Put another way, a physician

associated with a physician organization "is deemed to have a direct

7. Id. § 1395nn(g)(4).

8. See HHS-OIG-Fraud Prevention & Detection-Enforcement Actions-Administrative
Actions, http://www.oig.hhs.gov/fraud/enforcement/administrative/cmp/cmp.html (explaining that

OIG can seek money penalties for statutory violations) (last visited Aug. 3, 2008).

9. Id.

10. 42 C.F.R. § 1003 (2007).

11. Id. § 1003. 100(a) (explaining basis of the regulation).

12. Physicians' Referrals to Health Care Entities with Which They Have Financial

Relationships, 66 Fed. Reg. 856 (Jan. 4, 2001) (to be codified at 42 C.F.R. pts. 411 & 424)
[hereinafter Phase I].

13. Id.

14. Physicians' Referrals to Health Care Entities with Which They Have Financial

Relationships (Phase II), 69 Fed. Reg. 16,054 (Mar. 26, 2004) (to be codified at 42 C.F.R. pts. 411

& 424) [hereinafter Phase II].
15. Id.

16. Phase III, supra note 1.

17. Id.

18. Mat 5 1,028.
19. Id.



2008] HEALTH LAW 1083

compensation arrangement with a [designated health services entity] if the only

intervening entity between the physician and the [designated health services]

entity is [the] physician organization."
20

In effect, this change means that many
arrangements that would have constituted an indirect compensation arrangement
if analyzed under Phase I and Phase II of the Stark Law are now viewed as direct
compensation arrangements and will have to be analyzed under Phase EI to

determine whether an applicable exception can be met in order for the physician

to continue to make referrals to the DHS entity. The "stand in the shoes"
provisions are effective as of the effective date of the Phase IE final rule.

21

Existing arrangements, however, do not need to be amended during the original
or current renewal term of the agreement to comply with Phase III.

22
At the

expiration of the original or current renewal term of the existing arrangements,

the arrangement must then be structured to comply with the requirements of

Phase m.23

2. Physician Recruitment Exception.—The physician recruitment exception
exempts remuneration provided by a hospital to a physician "to induce the

physician to relocate his or her practice to the geographic area served by the

hospital in order to be a member of the hospital's medical staff."24 Phase m
expands this exception to cover rural health clinics.

25
Additionally, other

significant changes to this exception were implemented through the Phase IE

regulations and are discussed below.

a. Geographic area.—CMS modified the manner in which hospitals
determine the geographic area served by the hospital for purposes of this

exception. Phase II provided that the exception required the recruited physician

to relocate his or her practice to the area composed of "the lowest number of
contiguous zip codes from which the hospital draws at least 75[%] of its

inpatients."
26

Phase IE has not altered this requirement, but CMS has provided
clarification that is beneficial to a hospital in determining its geographic area.

The term "contiguous zip codes" includes zip codes that are contiguous to the zip
code in which the hospital is located, and the term is also intended to include zip

codes that are contiguous to each other.
27

For purposes of determining the

geographic area which it serves, a hospital should examine its inpatient data and

identify the lowest number of zip codes that touch at least one other zip code in

which inpatients reside that comprise at least 75% of its inpatients at the time the
parties execute the recruitment agreement.

28
If a hospital can achieve the 75%

threshold ofinpatient admissions through multiple configurations, it may use any

20. Id.

21. Id. at 51,012 (listing the effective date as December 4, 2007).

22. Id. at 5 1,028.

23. Id.

24. 42 C.F.R. § 411.357(e) (2007).

25. Phase III, supra note 1, at 51,048.

26. Id. at 5 1,049.

27. Mat 51,050.
28. Id.



1084 INDIANA LAW REVIEW [Vol. 41:1081

of the configurations.
29

In the event a hospital does not draw at least 75% of its
inpatients from all of the contiguous zip codes from which it draws inpatients,

then the hospital's geographic area would be all of the contiguous zip codes from

which it draws its inpatients.
30

Furthermore, CMS provided that a hospital may
recruit a physician to a zip code from which it draws no inpatients if that zip code

is entirely surrounded by contiguous zip codes from which the hospital draws at

least 75% of its inpatients (i.e., a zip code "hole" in the contiguous area).31

In response to commentary urging CMS to provide different requirements for
recruiting physicians to outlying areas, CMS has expanded the definition of
geographic area served by hospitals located in rural areas. A rural area is defined
as an area that does not constitute a metropolitan statistical area.

32
For a hospital

located in a rural area, it may determine the geographic area it serves based on
"the lowest number of contiguous zip codes from which it draws at least 90[%]
of its inpatients."

33 Where a hospital in a rural area "draws fewer than 90% of
its inpatients from all of the contiguous zip codes from which it draws

inpatients," the hospital's geographic "may include non-contiguous zip codes,
beginning with the non-contiguous zip code area in which the highest percentage

of the hospital's inpatients residef], and continuing" the process of adding non-

contiguous zip code areas based on the order of descending percentages of

inpatients.
34

In addition to this special rule for rural hospitals, such hospitals may
also determine the geographic areas in which they serve based on the alternative

"methodologies applicable to all hospitals."

Pursuant to Phase in modifications, CMS now permits rural health clinics,
rural hospitals, and federally qualified health centers to recruit physicians to

areas outside of the geographic area they serve if the facility satisfies all other

requirements ofthe exception and the facility establishes a demonstrable need for

the recruited physician's services as determined by the Secretary of the

Department of Health and Human Services through the advisory opinion
process.

35

b. Relocation requirement.—The Phase II regulations created some
confusion regarding the relocation requirement of the physician recruitment

exception, and CMS attempted to clarify this issue through the Phase III
comments.

36 The exception requires that the recruited physician relocate his or
her practice to the geographic area served by the hospital.

37
In order for a

recruited physician to satisfy this requirement, the recruited physician must

29. Id.

30. Id.

31. Id.

32. Id. at 5 1,042.

33. Id. at 5 1,049-50.

34. Mat 5 1,050.
35. Id. at 51,056.

36. Id. at 51,050.

37. Id.



2008] HEALTH LAW 1085

comply with both aspects of the requirement.38 First, the recruited physician
must move his or her practice from outside of the hospital's geographic area into
the hospital's geographic area.

39
Second, the recruited physician must either

move his or her practice at least twenty-five miles or "derive at least 75 [%] of his
or her practice's revenues from . . . new patients."40 CMS has exempted certain
individuals from the relocation requirement. In Phase II, CMS provided that
residents and physicians who have been in practice one year or less would not be
considered to have an established medical practice to relocate.

41
Recruitment

arrangements with such physicians could qualify for the exception regardless of

whether the recruited physician moved his or her practice location, so long as all
other requirements of the exception were met.

42 CMS has clarified that for
purposes of this exception, the term resident "includes all training, including

post-residency fellowships."
43

c. Recruitment arrangements involving group practices.—Another aspect
of the physician recruitment exception in which CMS made significant changes
was to arrangements between the recruited physician and a physician practice.
The two significant areas that were addressed by CMS were practice restrictions
and income guarantees.

In Phase n, CMS prohibited physician practices from imposing additional
practice restrictions in recruiting arrangements with recruited physicians that

were not related to quality of care.
44

Specifically, CMS indicated that non-
compete restrictions were categorically impermissible.

45 CMS received
substantial commentary suggesting that such prohibitions created significant
obstacles for recruiting and created confusion for physician practices regarding

the type of practice restrictions that were prohibited.
46

Based on these

"unintended results," CMS revised the language of the exception to prevent
physician practices from imposing only those "restrictions that unreasonably

restrict the recruited physician's ability to practice medicine in the geographic

area served by the hospital."
47 As guidance for this revision, CMS provided

examples of restrictions that it would not consider unreasonable restrictions
having a substantial effect on the recruited physician's ability to remain and

practice medicine in the hospital's geographic area after leaving the practice

group: (1) "restrictions on moonlighting"; (2) "[p]rohibitions on soliciting

patients and/or employees of the physician practice"; (3) requirements that "the

recruited physician not use confidential or proprietary information of the

38. Id.

39. Id.

40. Id.

41. Phase II, supra note 14, at 16,094-95.

42. Id.

43

.

Phase III, supra note 1 , at 5 1 ,05 1

.

44. Phase II, supra note 14, at 16,096-97.

45. Id.

46. Phase III, supra note 1, at 51,053.

47. Id. at 51,054.



1086 INDIANA LAW REVIEW [Vol. 41:1081

physician practice"; (4) requirements that "the recruited physician . . . repay

losses of his or her practice that are absorbed by the physician practice in excess

of any hospital recruitment payments"; and (5) requirements that "the recruited

physician pay a predetermined amount of reasonable damages ([i.e.,] liquidated

damages) if the physician leaves the physician practice and remains in the

community."
48

The expansion of the regulation to prohibit only those practice restrictions

that unreasonably restrict the recruited physician's ability to practice medicine

in the geographic area served by the hospital is beneficial in the recruiting

process, but the reasonableness standard imposes a burden on hospitals to pass

judgment on the reasonableness of the practice restrictions imposed by physician

practices. Furthermore, CMS addressed the Phase II prohibition of non-compete
clauses in recruitment arrangements.

49
The purpose of the prohibition was to

discourage physician practices that recruit physicians using hospital resources

from impeding the recruited physician's ability "to remain in the community and
fulfill his or her obligations under the recruitment arrangement with the

hospital."
50 CMS, however, recognized that unless a physician practice was

"able to impose a limited, reasonable non-compete clause," it may face
significant difficulty in recruiting or be "reluctant to hire additional physicians"

even with financial assistance from hospitals.
51

Although compliance with state

and local non-compete laws is not required, CMS cautioned that any practice
restrictions that do not satisfy applicable state and local laws "run a significant

risk of being considered unreasonable."
52 CMS noted, however, that nothing in

this section was intended to prevent a hospital from entering into an agreement
with a physician practice that would prohibit the physician practice from
imposing a non-compete provision or other practice restrictions on recruited

physicians.
53

The recruitment exception also imposes restrictions on hospital-subsidized
income guarantees.

54
Physician practices may not allocate more than "the

group's actual additional incremental costs attributable to the recruited

physician" under an income guarantee.55 CMS clarified that this limitation of
actual additional incremental costs applies to any type of income guarantee,

whether it is based on net income, gross income, revenues, or some other
variation.

56
In addition, CMS established a narrow exception for a physician who

is recruited to a rural area or Health Professional Shortage Area ("HPSA") to
replace a physician who, within the previous twelve months, has retired,

48. Id. at 5 1,053-54.

49. See id.

50. Id. at 51,054.

51. Id.

52. Id.

53. Id.

54. Id. at 5 1,052-53.

55. Id.

56. Id. at 5 1,052.



2008] HEALTH LAW 1087

relocated outside the geographic area, or has died.
57

For purposes of an income

guarantee in such situations, the physician group may "allocate to the recruited
physician a per capita allocation of the practice's aggregate overhead and other

expenses"; however, this amount shall not "exceed 20[%] of the practice's

aggregate costs."
58 CMS noted that this limitation applies only to hospital-

subsidized income guarantees.
59 Where a physician practice uses its own funding

to recruit physicians, the group is permitted to use any cost allocation method

when compensating the recruited physician so long as the arrangement satisfies
the requirements of an applicable exception (i.e., bona fide employment
relationship exception or in-office ancillary services exception).

60 CMS
identified the following examples ofexpenses that generally qualify as recruiting

expenses: (1) "headhunter fees"; (2) "travel . . . and moving expenses associated

with . . . recruitment"; (3) "employee benefits, taxes and professional fees

attributable to hiring the recruited physician"; and (4) the cost of tail insurance

covering the physician's prior practice.
61 CMS noted, however, these expenses

are limited to those involved in the recruitment of the physician and do not

include costs incurred after the physician is recruited and has joined the

physician group.
62

If a hospital pays a physician group for the time its physicians

spend recruiting, then such compensation would have to satisfy one of the
compensation exceptions (other than the recruitment exception) because such

costs do not qualify as recruitment expenses for purposes of this exception.
63

Where compensation is made directly to the physician practice, CMS confirmed
the requirement that the recruitment agreement must be signed by the hospital,

the recruited physician, and the physician practice.
64

However, nothing in the

regulation precludes the recruitment agreement from being executed in

counterparts.
65

d. Other additional clarifications to the recruitment exception.—Following
the Phase II regulations, there was confusion regarding the extent of the
relocation exception afforded to residents.

66
In Phase IE, CMS clarified that the

requirement that the recruited physician join the hospital's medical staff is a

separate requirement from the relocation requirement.
67

Although residents are

exempt from having to relocate their medical practice to the geographic area

served by the hospital, residents must satisfy the requirement that they join the

57. Id.

58. Id.

59. Id.

60. Id.

61. Id.

62. Id.

63. Id.

64. Mat 51,051.
65. Id.

66. Id. at 51,048.

67. Id.



1088 INDIANA LAW REVIEW [Vol. 41:1081

hospital's medical staff.
68

Therefore, in order to qualify for the recruitment

exception, a "recruited physician cannot already be a member of the hospital's
medical staff."

69

3. Fair Market Value.—In Phase EI, CMS revised the fair market value
exception to expressly exclude leases for office space.

70
In order to comply with

the Stark Law, leases must comply with the rental of space exception located at
42 C.F.R. § 41 1 .357(a).

71 CMS also clarified that the fair market value exception
applies to compensation paid by a referring physician to a DHS entity and to
compensation paid by a DHS entity to a referring physician.72 CMS declined to
elaborate on what constitutes fair market value or create a rebuttable presumption

that all transactions are fair market value.
73 CMS stated,

The parties to a transaction or an arrangement are in the best position to
ensure that the remuneration is at fair market value and to document it
contemporaneously. If questioned by the government, the burden would
be on the parties to explain how the transaction meets the fair market
value compensation exception requirements.

74

Additionally, Phase HI deletes the safe harbor that CMS established for
hourly payments to physicians for personal services.

75 The Stark Law previously
allowed physicians and hospitals to guarantee that hourly payments did not

exceed fair market value by setting the payment at a rate less than or equal to the
rate for emergency room physicians in the relevant physician market or the
average of the fiftieth percentile of national compensation levels for physicians

in the same specialty in at least four of six surveys.76 In Phase IH, CMS
recognized that taking advantage of this safe harbor was almost impossible as
several of the surveys no longer exist and that "it may be infeasible to obtain
information regarding hourly rates for emergency room physicians at competitor
hospitals."

77
Without the safe harbor, hospitals and physicians must

independently determine whether a payment rate is consistent with fair market
value based on the nature of transaction, its location, and other factors.

4. Retention Payments.—In Phase III, CMS provided some additional
flexibility in efforts to retain physicians in underserved areas. A hospital,
federally qualified health center, or a rural health clinic (all referred to as

"hospital" below) may make payments to a physician on the hospital's medical
staff to retain the physician's medical practice in the geographic area served by

68. Id.

69. Id.

70. Id. at 5 1,059.

71. Id.

72. Id.

73. Id. at 51,060.

74. Id.

75. Id. at 51,070.

76. Id. at 51,015.

77. Id.



2008] HEALTH LAW 1089

the hospital if all the following conditions are met: (1) the physician has a bona

fide firm, written recruitment offer or offer of employment from a hospital,

academic medical center, or physician organization that is not related to the

hospital making the payment; (2) the offer must specify the remuneration being

offered and "require the physician to move the location of his or her medical
practice at least [twenty-five] miles and outside of the geographic area served by

the hospital making the retention payment"; (3) any retention payment must meet

the requirements for recruitment payments: (i) in writing and signed by both

parties; (ii) not conditioned on the physician's referral of patients to the hospital;

(hi) does not take into account the volume or value of any actual or anticipated

referrals by the physician or other business generated between the parties; and

(iv) the physician is allowed to establish staff privileges at any other hospitals

and to refer business to any other entities; (4) "[a]ny retention payment must be

subject to the same obligations and restrictions, if any, on repayment or

forgiveness of indebtedness" as the written recruitment offer or offer of

employment; and (5) the retention payment must not exceed the lower of: (i)

"[t]he amount obtained by subtracting the physician's current income from . . .

the income the physician would receive from comparable physician" related

services in the written recruitment or employment offer, "provided that the

respective incomes are determined using a reasonable and consistent

methodology and that they are calculated uniformly over no more than a [twenty-

four]-month period"; or (ii) "the reasonable costs the hospital . . . would

otherwise [incur] to recruit a new physician to the geographic area served by the
hospital ... to join the medical staff of the hospital ... to replace the retained

physician."
78

Phase IQ has added another basis on which retention payments can be made
to a physician. In addition to a bona fide written offer, a hospital can furnish

such payments if it receives a written certification from a physician that the

physician has a bona fide opportunity for future employment by a hospital,

academic medical center, or a physician organization that requires the physician

to move the location of his or her medical practice at least twenty-five miles and
outside the geographic area served by the hospital.

79 The written certification
must contain at least the following: (1) "details regarding the steps taken by the

physician to obtain the employment opportunity; [(2)] details of the physician's

employment opportunity, including the identity and location of the physician's

future employer and/or employment location, and the . . . anticipated income and

benefits (or a range of income and benefits)"; (3) certification "that the future

employer is not related to the hospital . . . making the payments]; [(4)] the date

on which the physician anticipates relocating his or her medical practice; and

[(5)] information sufficient for the hospital ... to verify the information included

in the written certification."
80 The hospital must verify that the physician has a

bona fide opportunity for future employment that requires the physician to

78. Id. at 51,065

79. Id. at 5 1,066

80. Id.



1090 INDIANA LAW REVIEW [Vol. 41:1081

relocate outside the geographic area served by the hospital.
81 Any retention

payment may not exceed the lower of: (1) "an amount equal to 25% of the
physician's current annual income" (measured over no more than a twenty-four-

month period), "using a reasonable and consistent methodology that is calculated
uniformly; or (2) the reasonable costs [that] the hospital would otherwise have

to expend to recruit a new physician ... to replace the retained physician."82

Any retention payment (whether pursuant to an actual written offer or a
physician certification) must also meet the following requirements: "(1) the

physician's current medical practice has to be located in a rural area, a HPSA"
(regardless of the physician's specialty), in an area with demonstrated need for

the physician as determined in an advisory opinion, or "at least 75[%] of the

physician's patients [must] reside in a medically underserved area or [be]

members of a medically underserved population"; (2) the hospital must not enter
into a retention arrangement with a particular referring physician more frequently
than once every five years; (3) "the amount and terms of the retention payment

must not be altered during the term of the arrangement in any manner that takes
into account the volume or value of referrals or other business generated by the

physician"; and (4) the arrangement must not violate the anti-kickback statute or

any other applicable federal or state law.
83

5. Temporary Non-Compliance.—Subject to certain conditions detailed
below, there is an exception for temporary noncompliance if: (1) the financial

relationship between the entity and the referring physician fully complied with

"an applicable exception for at least 180 consecutive calendar days immediately

preceding the date on which the financial relationship become noncompliant; (2)
the financial relationship fell out of compliance for reasons beyond" the control

of the entity, and the entity promptly took steps to rectify "the noncompliance;

and (3) the financial relationship does not violate the anti-kickback statute."
84

This exception only applies to designated health services furnished during the

period of "time it takes the entity to rectify the noncompliance, which must not

exceed [ninety] consecutive calendar days following the date on which the
financial relationship" becomes noncompliant with an exception.

85
In the Phase

EI preamble, CMS steadfastly rejected suggestions that this time period be
extended such as a suggestion that the period run from the date ofnoncompliance

until thirty or ninety days after the date the noncompliance was discovered. CMS
stated, "A discovery-based rule is contrary to the statutory scheme. Moreover,
such a rule creates a perverse incentive not to diligently monitor and enforce

compliance."
86 The temporary non-compliance exception may be used by an

entity only "once every three years with respect to the same referring
physician."

87
Finally, this exception will not apply if the exception with which

81. Id.

82. Id.

83. Id. at 51,065-66.

84. Id. at 51,024 (citing 42 C.F.R. § 41 1.353(f) (2007)).

85. Id. (citing 42 C.F.R. § 41 1.353(f) (2007)).

86. Id. at 51,025.

87. Id. at 51,024.



2008] HEALTH LAW 1091

the financial relationship previously complied related to the non-monetary

compensation exception or the medical staff incidental benefits exception.
88

In the preamble to the Phase HI regulations, CMS stated:

Entities should maintain adequate and contemporaneous documentation

of all financial relationships with referring physicians, including: [(1)]
[t]he terms of each arrangement; [(2)] [w]hether and how an
arrangement fell out ofcompliance with an exception; [(3)] [t]he reasons

for the arrangement falling out of compliance; [(4)] [s]teps taken to bring

the arrangement into compliance; [(5)] [Relevant dates; and [(6)]
[s]imilar information.

89

6. Amendment to Existing Agreements.—In Phase IE, CMS addressed the
amendment ofagreements between a DHS entity and a referring physician.90 The
concept applies to space and equipment leases and personal services

agreements.
91

In commentary, CMS stated that

parties may not change the rental charges at any time during the term of
the agreement. Parties wishing to change the rental charges must

terminate the agreement and enter into a new agreement with different
rental charges and/or terms; however, the new agreement may be entered
into only after the first year of the original . . . term.

92

Other provisions not impacting the rental charges or related provisions may be
amended at any time so long as "the rental charges are not changed and [the]
other requirements of the exception are satisfied."

93
This concept also applies to

terms regarding compensation under personal services agreements.
94

7. Physicians and Group Practices.—Phase IE clarifies that independent
contract physicians must furnish patient care services under a direct contract with

the group, not between the group and another entity.
95

Additionally, Phase HI

states that independent contractors must perform services in a group facility in

order to be considered a physician in the group practice.
96

B. OIG Actions

1. Advisory Opinion 07-10: Hospital Payment to Physiciansfor On-Call and
Indigent Care Services.—On September 20, 2007, the U.S. Department ofHealth
and Human Services, Office ofInspector General (OIG) issued Advisory Opinion

88. Id.

89. Id. at 5 1,026.

90. Id. at 5 1,044.

91. See id.

92. Id.

93. Id.

94. Id.

95. Mat 51,082-83.
96. Id.



1092 INDIANA LAW REVIEW [Vol. 41:1081

07- 10.
97

This was the first advisory opinion addressing a hospital's payment to
physicians for providing on-call and indigent care services. Based on the specific

facts of the arrangement, the OIG determined that it would not impose sanctions
on the facility at issue.

98 Under the facility's arrangement, the physicians were
obligated to: participate in call rotation equally within specialties, provide

inpatient care to any patient seen in the emergency department while on-call if

the patient was admitted to the facility regardless of the patient's ability to pay
for the care, respond to calls within a reasonable time and such times would be
monitored, collaborate and participate in risk management and performance
improvement efforts and committees, and document in the medical records in a
timely fashion the services provided for all patients seen.

99
Physicians were paid

a per diem rate for each day spent on-call, except for the requirement that each
physician was required to provide one and one-half days of on-call services each
month without payment. 100 The per diem rate varied based on the specialty and
whether call coverage was on a weekend or weekday. 101 The facility engaged an
independent health care industry consultant to advise the facility on "the

reasonableness of the per diem rates paid under the [a]rrangement."
102

The OIG emphasized three particular aspects of the arrangement that were
influential in its decision to not impose sanctions.

103
First, the payments to the

physicians reflected the fair market value of the services provided, and such

evaluation was determined by an independent third party analysis without regard
to referrals or other business generated between the parties.

104 The payments
were tailored to reflect the actual burden on the physicians, the likelihood of

actually having to respond, the likelihood of having to provide uncompensated

care, and the likely extent of treatment.
105 Beyond actual time spent, the

physicians were obligated to provide care to any patient seen while on-call, and

the obligation continued until the patient's discharge (meaning the physicians

remain at risk of having to furnish additional services for no additional

payment).
106 The physicians were required to provide eighteen days per year of

uncompensated on-call services as part of the arrangement.
107 The physicians

assumed responsibility for medical recordkeeping and for cooperation with the
facility relating to risk management and performance improvement efforts. 108

97. OIG Advisory Opinion No. 07-10 (Sept. 20, 2007), http://oig.hhs.gov/fraud/docs/

advisoryopinions/2007/AdvOpn07-10A.pdf.

98. Id. at 1-2.

99. Id. at 2-3.

100. Id. at 4.

101. Id.

102. Id.

103. See at 8-10.

104. Id. at 8-9.

105. Id.atZ.

106. Id.

107. Id.

108. Id.



2008] HEALTH LAW 1093

"The difference in per diem rates among specialties [was] based on the different
extent of the uncompensated responsibilities that [would] likely fall on the

physicians," and the payments were "administered uniformly for all [physicians]

in a given specialty without regard to [an] individual physician's referrals" or

other business generated between the parties.
109

Second, the facility evaluated the circumstances giving rise to the

arrangement and determined that the facility "had a legitimate, unmet need for

on-call coverage and uncompensated care physician services."
1 10 The emergency

department was understaffed because of a "lack of capable and willing

physicians."
111

Because of the on-call physician shortage, the facility was forced

to transfer patients to other hospitals for the appropriate care. The OIG indicated
that the presence of these factors lowered the risk that the arrangement may lead
to federal program and patient abuse.

112

Finally, the arrangement contained many additional safeguards that
"minimize[d] the risk of fraud and abuse."

113 The opportunity to provide on-call
services pursuant to the arrangement was "offered ... to all physicians in
relevant specialties."

114 The obligations within the specialties were "divided as
equally as possible" to avoid being used selectively to reward the highest

referrers.
115

Additionally, the participating physicians were required to provide

follow-up care to any patient seen in the emergency department while on-call if

the patient was admitted, regardless of patient's ability to pay for care.
116

This

requirement decreased the chance for physicians to "cherry-pick" only those

patients that were likely to be lucrative.
117

Furthermore, the requirement that

physicians document the on-call services promoted "transparency and

accountability."
118

The OIG was careful to tailor its opinion to the specific facts of this
arrangement and stated that each on-call coverage arrangement must be evaluated

based on the totality of the facts and circumstances surrounding it.
119

2. Advisory Opinion 07-05: Sale ofAmbulatory Surgery Center Ownership

Interests.—On June 12, 2007, the OIG issued an advisory opinion relating to the
sale of interests in an ambulatory surgery center by physician owners.

120 The
proposed arrangement involved an ambulatory surgery center ("ASC") in which

109. Id. at 9

110. Id.

111. Id.

112. See id.

113. Id.

114. Id.

115. Id.

116. Id.

117. Id.

118. Id.

119. Id. at 1'

120. OIG AOIG Advisory Opinion No. 07-05 (June 12, 2007), http://oig.hhs.gov/fraud/docs/

advisoryopinions/opinions/2007/Advopin07-05C.pdf.



1094 INDIANA LAW REVIEW [Vol. 41 : 1081

three orthopedic surgeons owned 94%, and two gastroenterologists and two
anesthesiologists owned the remaining 6%.

121
"Under the [p]roposed

[a]rrangement, the [o]rthopedic [sjurgeons would sell to the [tax-exempt]
[h]ospital the number of ownership units necessary for the [h]ospital to own
40[%]."

122 The amount to be paid by the hospital was certified to be fair market
value for the units.

123
"The amount paid by the [h]ospital [to the orthopedic

surgeons for the units] would exceed the amount originally invested by the
[o]rthopedic [s]urgeons for this number of units."

124 The hospital acknowledged
it would be a in position to influence referrals; however, it agreed to limit its

ability to make referrals by agreeing to a number of requirements found to be
sufficient in other advisory opinions issued by the OIG.

125

The OIG, however, found that the proposed arrangement failed to meet all
of the criteria under the hospital/physician owned ASC safe harbor. 126

Specifically, the OIG found that the arrangement would not meet the criterion
that the amount paid to an investor in return for the investment must be directly
proportional to the amount of the capital investment of that investor.

127 The OIG
noted that while each investor would receive a return on investment proportional
to the investor's ownership share, the return would not be proportional to the
capital invested by the original investor.

128 The OIG found relevant the fact that
the hospital would buy its shares from the orthopedic surgeons rather than the
ASC itself. 129

The OIG noted that it could not

conclude that the difference in cost of capital acquisition, which results

in financial gain to a subset of the physician investors whose referrals
may be particularly valuable, is not related, directly or indirectly, to the
value or volume of referrals or other business generated between the
parties, including referrals by the selling [o]rthopedic [s]urgeons to the
[h]ospitalortheASC.

130

The OIG found that the arrangement posed "a heightened risk of fraud and
abuse" and concluded that the "[a]rrangement could potentially generate

prohibited remuneration under the anti-kickback statute."
131

The opinion focuses on the fact that orthopedic surgeons would realize a gain

121. Mat 2.
122. Id.

123. Id.

124. Id

125. See id. at 3.

126. Mat 5.
127. Id.

128. Id.

129. Mat 5.
130. Id. at 6.

131. Id.



2008] HEALTH LAW 1095

on their original investment.
132

However, as certified by the parties, the fair

market value of the interests increased since the orthopedic surgeons' original

investment.
133

Thus, the advisory opinion leaves unanswered how to reconcile
the fair market value requirement with the return on original investment

requirement of the hospital/physician owned ASC safe harbor. If not clarified,
the opinion could have a significant impact on the potential resale of interests by

physician investors.

3. OIG Compliance Guidance Applies to Medical Device Firms.—On
September 6, 2006, the Advanced Medical Technology Association
("AdvaMed") sent a letter to the OIG asking for "confirmation that the 1989
Special Fraud Alert on Joint Ventures" as well as other fraud and abuse

"guidance on physician investment issued by the OIG apply to medical device
and distribution entities," clarification on "certain factors relevant to analyzing

a joint venture under the fraud and abuse law[s]," and a request for publication

of additional OIG guidance on physician investment in medical device firms. 134

On October 6, 2006, the OIG issued a response letter confirming that the
OIG's 1989 Special Fraud Alert on Joint Ventures as well as other fraud and

abuse guidance applies to medical device and distribution entities.
135 The OIG

stated that it believes "all industry stakeholders involved in joint ventures with

physicians, including medical device manufacturing and distribution entities, are

well-advised to pay close attention to such guidance. Most ofour guidance about
joint ventures is not sector specific and applies equally to all physician joint

ventures."
136

Additionally, the OIG clarified that "the amount of revenues
generated directly or indirectly by a physician investor is a relevant factor in

analyzing ajoint venture under the anti-kickback statute."
137 The OIG noted that

the "small entity . . . safe harbor . . . includes a condition that limits safe harbor

protection to entities that derive no more than 40% of their gross revenues from
investors, such as physicians."

138 The OIG stated, "the fact that a substantial
portion of a venture' s gross revenues is derived from participant-driven referrals

is a potential indicator of a problematic joint venture."
139

n. Tax

In 2006 and 2007, the major tax developments again surrounded tax-exempt

hospitals and the provision ofcommunity benefits. Various levels ofgovernment

132. See id. at 5-6.

133. Id. at 2.

134. Office of Inspector Gen., Dep't of Health & Human Servs., Response to Request for
Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2005),

http://www.oig.hhs.gov/fraud/docs/alertsandbulletins/GuidanceMedicalDevice%20(2).pdf.

135. Id.

136. Id. at I.

137. Mat 2.
138. Id. (citing 42 C.F.R. § 1001.952(a) (2005)).

139. Id. (citing 70 Fed. Reg. 4858, 4865 (Jan. 31, 2005)).



1096 INDIANA LAW REVIEW [Vol. 41:1081

undertook investigations and other efforts to clarify, examine, and quantify the

community benefit standard and ensure that hospitals are operating in a manner

that justifies granting such organizations tax-exempt status.

A. Redesigned Form 990

The most significant healthcare development in the area of tax was the
redesign of the Form 990. On June 14, 2007, the Internal Revenue Service
("IRS") released for public comment a discussion draft of a redesigned Form 990
("Discussion Draft").

140 Form 990 is the annual return filed by many public
charities and other exempt organizations and reports information about the

organization' s operations.
141 The IRS ' s objectives were to promote transparency

to the IRS and the public, accurately portray operational information to ensure

effective assessment of noncompliance, and minimize filing burdens.
142 An

overarching theme in the Discussion Draft was that the IRS intended to solicit

detailed information about an organization' s operations and, specifically, how the
organization carries out its operations with a focus on areas involving potential

abuse.
143

Additionally, the IRS sought to provide organizations with more

opportunities to explain the organization's operations and charitable purpose.
144

The Discussion Draft included a ten-page core form that all organizations
would be required to fill out and then a series of fifteen schedules to be
completed by organizations engaging in particular activities.

145 One of the major
changes made to Form 990 is the creation of a summary page that is intended to
reflect a "snapshot" of important aspects of an organization's operations that are

addressed in greater detail in the rest of the core form.
146 The summary page

includes information regarding the total size of the governing board, the number
of "independent" members ofthe governing board, the amount paid to the highest
paid employee, and the total executive compensation paid as a percentage of

overall program service expenses.
147

The remainder of the core form requests
information regarding composition of the governing board and other governance

and financial statement practices, joint venture disclosures, compensation

disclosures for disqualified persons and compensation of current and certain

former officers, directors, trustees, key employees and the top five highest paid

employees, and bond-related disclosures.
148

The series of schedules focus on particular conduct, including fundraising,

1 40. Tax-Exempt& Gov't Entities Div., IRS, Background Paper—Redesigned Draft
Form 990 (2007), http://www.irs.gov/pub/irs-tege/form_990_cover_ sheet.pdf.

141. Id. atl.

142. Id. at 2.

143. See generally id.

144. See generally id.

145. Id. at 2, 4.

146. Id. at3.

147. Id.

148. Id. at 3-4.



2008] HEALTH LAW 1097

compensation, hospitals, tax-exempt bonds, and non-cash charitable

contributions. Schedule H will be the key schedule for health care organizations
and will be the vehicle through which such organizations will explain how they
satisfy the community benefit standard for exemption. The Community Benefit
Report contained within Schedule H addresses: cost-based data for various
community benefits, including charity care (without clarifying whether bad debt
is included for this purpose), Medicaid and other government programs (without

clarifying whether Medicare shortfalls are included for this purpose), a

description of any written charity care policy, a description of how the
organization assesses the healthcare needs of its community, information about

ER policies and procedures, and how the hospital's operations facilitate exempt
purposes. Further, the scope of Schedule H extends beyond the community
benefit test and encompasses billing information broken down by categories of
healthcare coverage, a description ofany written collection policy, including how
and when the policy is communicated to patients and how the organization
collects patient debts and a description of the patient intake process and the

education provided to patients regarding their eligibility for government

assistance or charity care.

After the ninety-day comment period, the IRS reviewed the numerous
comments provided from tax community regarding the Discussion Draft. The
IRS is in the process of making additional revisions in response to the comments
received and will release the new Form 990 for organizations to complete for
returns filed in 2009 for the 2008 tax year.

149

B. Congressional Budget Office Report—Nonprofit Hospitals
and the Provision of Community Benefits

In December 2006, the Congressional Budget Office ("CBO") published a
report comparing the provision ofcommunity benefits provided by nonprofit and
for-profit hospitals.

150 The report was requested by the Chairman of the House
Committee on Ways and Means to examine whether nonprofit hospitals provide
community benefits sufficient to justify their tax-exempt status.

151 The results
indicated that, "on average, nonprofit hospitals provided higher levels of

uncompensated care than did similar for-profit hospitals [;] . . . however, the

provision of uncompensated care varied" significantly among nonprofit
hospitals.

152
In addition, "[n]onprofit hospitals were more likely than otherwise

149. In December 2007, the IRS released the final version of the redesigned Form 990.

Information about the redesigned Form 990, a copy of the Form 990 and its schedules, and

information about transitional relief can be found at http://www.irs.gov/charities/

article/0„id=176613,00.html.

150. Cong. Budget Office, Nonprofit Hospitals and the Provision of Community

Benefits (2006), http://www.cbo.gov/ftpdocs/76xx/doc7695/12-06-Nonprofit.pdf [hereinafter

CBO Report].
151. Donald B. Marron, Preface to CBO REPORT, supra note 150.
152. CBO Report, supra note 150, at 9.



1098 INDIANA LAW REVIEW [Vol. 41:1081

similar for-profit hospitals to provide certain special [ty] services," but the

nonprofit hospitals provided care "to fewer Medicaid-covered patients as a share

of their total patient population."
153

Finally, the results showed that, "[o]n

average, nonprofit hospitals . . . operate[d] in areas with higher average incomes,

lower poverty rates, and lower rates of uninsurance than [similar] for-profit

hospitals."
154

C. Healthcare Financial Management Association Released Revised
Accounting Guidelinesfor Healthcare Providers

Regarding Bad Debt and Charity Care

Also in December 2006, the Healthcare Financial Management Association
("HFMA") released the updated Statement No. 15 intended to improve clarity
and address congressional and legal questions about the reporting practices of

tax-exempt hospitals for charity care and bad debt.
155 Where a hospital provides

services to a patient determined to have the financial capacity to pay for the

services and the patient later fails to pay the amount, this results in a bad debt.
156

Alternatively, charity care is where a hospital provides services to a patient that

has demonstrated an inability to pay for services.
157 The updated statement

discusses the determination of patient ability to pay and the amount of services

eligible for charity support.
158 While the focus is on tax-exempt hospitals, the

guidelines also apply "to all taxable and tax-exempt institutional healthcare

providers."
159

D. IRS Issues Draft Governance Guidelinesfor Charitable Organizations

On February 7, 2007, the IRS posted on its website an informal discussion
draft of recommended guidelines for good governance practices for charitable
organizations.

160 The IRS's position was that governing boards of charitable

153. Id.

154. Id.

155. Healthcare Fin. Mgmt. Ass'n, P&P Board Statement 15: Valuation and
Financial Statements Presentation of Charity Care and Bad Debts by Institutional

Healthcare Providers 1 (2006), http://www.hfma.org/NR/rdonlyres/B32E0CB5-9AE5-4127-

83A3-02FFDE0054D5/0/400530Statement 1 5 .pdf

.

156. Mat 2.
157. Id.

158. See generally id. at 2-12.

159. Id. at 2.

160. The IRS removed this posting from its website in response to changes in other related

policies. See GOVERNANCE OF CHARITABLE ORGANIZATIONS AND RELATED TOPICS, http://www.

irs.gov/ charities/article/0„id=178221,00.html (last visited Aug. 2, 2008). A copy of the original
post can be found at IRS, IRS Issues Discussion Draft of"Good Government Practices" for

50 1 (c)(3) Organizations 1 (2007), available at http://www.pgdc.com/pgdc/news-story/2007/02/

08/irs-issues-draft-good-governance-practices-501-c-3-organizations [hereinafter IRS ISSUES

Discussion Draft].



2008] HEALTH LAW 1099

organizations should be made up of individuals who are informed and active in
overseeing a charity's operations and finances.

161 The guidelines included
governance practice recommendations pertaining to an organization's mission

statement, code of ethics, due diligence, duty of loyalty, transparency,

fundraising policy, financial audits, compensation practices, and document
retention policy.

162

E. IRS Report on Exempt Organizations Executive Compensation
Compliance Project

"In 2004, the Internal Revenue Service, through the Exempt Organizations
Office of the Tax Exempt and Government Entities Division ('EO'),
implemented the Executive Compensation Compliance Initiative (the

'Project')."
163 The IRS intended to "[ijncrease awareness of compensation as a

compliance issue within the charitable sector[,] establish an IRS enforcement

presence in this area," examine the "practices and procedures exempt

organizations use to determine compensation oftheir officers, directors, trustees,

key employees, and related persons," and "[a]ssess and enhance tax law reporting

and compliance with respect to compensation practices of exempt

organizations."
164

Part I ofthe Project involved sending compliance check letters

regarding executive compensation to 1223 exempt organizations (both public

charities and private foundations) who were selected based on certain Form 990
responses.

165
Then, based in part on the Part I responses, Part II involved 782

examinations conducted "to determine whether the compensation of disqualified

persons was reasonable in accordance with" the Internal Revenue Code ("IRC")
requirements.

166

The EO released a report in March 2007 discussing the results of the Project
(the "Report").

167 The Phase I compliance checks revealed "significant reporting
errors and omissions in [certain] areas, particularly excess benefit transactions

and transactions with disqualified persons, as well as potential compliance issues

related to loans made to officers." 168 The EO noted that "the findings [were] not
based on a statistical sampling," only reflected the organizations selected for the

Project, "and are not representative of the entire regulated community."
169 Many

of the errors and omissions revealed were corrected when the organizations
provided additional clarifying information or filed amended returns; however,

161. IRS Issues Discussion Draft, supra note 1 60.

162. Id. at 2-3.

163. IRS,ReportonExemptOrganizationsExecutiveCompensation 1 (2007), available

at http://www.irs.gov/pub/irs-tege/exec._comp._final.pdf.

164. Mat 2.
165. Id. at 3.

166. Id. at 3-4.

167. Id. at I.

168. Mat 5.
169. Id.



1 100 INDIANA LAW REVIEW [Vol. 41:1081

5% of Phase I organizations were recommended for examination under Phase
n.

170 Of the 782 examinations, twenty-five "resulted in proposed or assessed
excise taxes aggregating in excess of $21 million against [forty] disqualified

persons or organization managers."
171 The assessments were imposed due to:

[(a)] excessive salary and incentive compensation; [(b)] payments for

vacation homes, personal legal fees, or personal automobiles that were

not reported as compensation; [(c)] payments for personal meals and

gifts to others on behalf of disqualified persons that were not reported as

compensation; and [(d)] payments to an officer's for profit corporation

in excess of the value of services provided by the corporation.
172

The Project results discussed in the Report led the EO to make several
statements and recommendations regarding potential abuse in the exempt

sector.
173 The EO indicated that the "Form 990 compensation reporting need[ed]

to be revised to facilitate accurate and complete reporting" and the "EO needs to
revisit . . . when penalties should be assessed for an incomplete Form 990." 174

Additionally, the EO determined that it needed to communicate with the public
regarding the most common return preparation errors identified during the
Project and "educate the public charity sector [regarding] the section 4958

rebuttable presumption and how to satisfy the requirements." 175 Finally, the EO
emphasized that the Project further "illustrate[d] the need for a continued

enforcement presence in this area" and that the "EO should continue to review
compensation issues."

176

F. Senator Grassley 's Letter Requesting Examination ofHow Nonprofit
Hospitals Fulfill Community Benefit Requirements

In April 2007, Senator Grassley, ranking member of the Committee on
Finance, asked the Government Accountability Office ("GAO") to study how
nonprofit hospitals meet the community benefit requirement in order to qualify
for tax-exempt status.

177
Senator Grassley expressed concerns regarding the

broad discretion for designation that hospitals have under the community benefit
standard and inconsistent reporting caused by the variation among hospital
policies relating to charity care and bad debt.

178
In addition, Senator Grassley

170. Id.

171. Id.atl.

172. Id.

173. Id. at 10.

174. Id.

175. Id.

176. Id.

177. Press Release, U.S. Senate Comm. on Fin., Grassley Seeks GAO Study of Non Profit
Hospitals' Community Benefits (Apr. 5, 2007), http://finance.senate.gov/press/Gpress/2007/

prg040507b.pdf.

178. Id.



2008] HEALTH LAW 1 101

was concerned about nonprofit hospitals' executive and board member
compensation and these individuals' involvement with for-profit business

ventures with the nonprofit hospitals.
179

Specifically, Senator Grassley requested that the GAO conduct a study
examining the following issues: (1) State and IRS community benefit standards

and hospital industry guidelines used to interpret these standards; (2) standards

and policies hospitals use pertaining to uncompensated care, charity care, and

bad debt and how hospitals interpret and report these categories in practice; (3)
standards hospitals use for defining and reporting community benefits other than
uncompensated care; and (4) nonprofit hospital executive and board member
compensation and these individuals' involvement in for-profit ventures with the

nonprofit hospitals.
180

IE. Reimbursement and Payment Issues

A. 2008 Physician Fee Schedule

On July 2, 2007, the Centers for Medicare and Medicaid Services ("CMS")
issued Proposed Revisions to Payment Policies under the Physician Fee Schedule
for CY2008 ("2008 Proposed Physician Fee Schedule"). 181 The 2008 Proposed
Physician Fee Schedule contains a number of proposed revisions to the Stark
regulations as well as solicitation of comments for a number of other potential
revisions to the Stark regulations.

182 Among other things, in the 2008 Proposed
Physician Fee Schedule, CMS discusses the anti-mark up provisions for
purchased tests, the In-Office Ancillary Services exception, independent

diagnostic testing facilities ("IDTFs") performance standards, per click

payments, and under arrangements relationships.
183 A brief summary of each of

these proposed changes is contained below.

1. The Anti-Markup Rule.—Under the Medicare Anti-Markup Rule, if a
physician bills Medicare for the technical component of a diagnostic test
performed by an outside supplier, the physician is prohibited from marking up
the charges for the technical component submitted to Medicare above what the

physician paid to purchase the test from the outside supplier.
184

Currently, the

Anti-Markup Rule does not apply to the professional component of a diagnostic

test.
185

In the 2008 Proposed Physician Fee Schedule, CMS proposed to expand the

179. Id.

180. Id.

181. Payment and Policies Under the Physician Fee Schedule, 72 Fed. Reg. 38, 1 22 (proposed

July 12, 2007) (to be codified at 42 C.F.R. pt. 409, 410, 41 1, 413, 414, 415, 418, 423, 424, 482,

484, 485, and 491).

182. Id. at 38,160.

183. See id. at 38,123.

184. Mat 38,179.
185. Id.



1102 INDIANA LAW REVIEW [Vol. 41:1081

Anti-Markup Rule to the technical and professional component services whether

they are "purchased interpretations" or provided under reassignment of rights,

unless the performing supplier is a full-time employee of the billing entity.
186

Thus, the only technical or professional services a medical group can mark-up are

those performed by the group's "full-time employees."
187

If adopted, this would

limit the ability of IDTFs and group practices with in-office imaging equipment

to use independent contractor (or part-time employee) radiologists to perform the

interpretations since the group practice would be limited to billing Medicare no

more than the amount actually paid to the radiologist. Additionally, CMS has
proposed to exclude from the "net charge" that can be passed through to

Medicare any amount attributable to rent or similar charges paid by the supplier

to the billing entity for space or equipment related to the provision of the

interpretations.
188

Although outside the survey period, on November 27, 2007, the 2008
Physician Fee Schedule final rule was published.

189 The final rule included the
anti-markup changes as noted above. However, on January 3, 2008, CMS
announced a one-year delay of the application of the anti-markup rule to certain

diagnostic services performed in certain locations.
190

2. In- Office Ancillary Services Exception.—The in-office ancillary services
exception permits a physician to order designated health services for his or her

Medicare and Medicaid patients and then have the physician's practice perform

and bill for the services without violating the Stark law if the physician is able

to meet certain supervision, billing, and building requirements.
191

In the 2008 Proposed Physician Fee Schedule, CMS did not issue any
specific revisions to the in-office ancillary exception, but instead requested

comments on whether changes to the in-office ancillary exception are necessary
and, if so, what changes should be made.

192 CMS specifically requested
comments on: (1) whether certain services should not be protected under the
exception (for example, any therapy services that are not provided on an incident
to basis and service that will not be used at the time of the patient's visit in order

to assist the physician with making a diagnosis or plan of treatment during the
visit); (2) whether, and, if so, how CMS should change the definition of "same

186. Id. at 38,180.

187. Id.

188. Id.

189. Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg. 66,222

(Nov. 27, 2007) (to be codified at scattered sections of 42 C.F.R.).

1 90. Delay of the Date of Applicability of the Revised Anti-Makeup Provisions for Certain

Services Furnished in Certain Locations, 73 Fed. Reg. 404 (Jan. 3, 2008) (to be codified at 42

C.F.R. pt. 414).

191. See 42 C.F.R. § 41 1.355(b) (2007); see also Revisions to Payment Policies Under the

Physician Fee Schedule, 72 Fed. Reg. 66,222 (Nov. 27, 2007) (to be codified at scattered sections

of 42 C.F.R.).

192. Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg. 66,222

(Nov. 27, 2007) (to be codified at scattered sections of 42 C.F.R.).



2008] HEALTH LAW 1 103

building" and "centralized building"; (3) whether non-specialist physicians

should be able to use the exception to refer patients for specialized services that

will be performed on equipment owned by non-specialist physicians; and (4)
suggestions on any other restrictions on ownership or investment in services that

would curtail program abuse.
193

3. IDTF Performance Standards.—In the 2007 Physician Fee Schedule,
CMS expanded the conditions of participation for IDTFs to require that at the
time of enrollment or re-enrollment, the IDTF must certify that it meets fourteen
additional performance standards.

194
In January, CMS issued Transmittal 187

which updated the Program Manual and some of the performance standards.
195

After much controversy, CMS rescinded the transmittal. 196 However, now CMS
is proposing, in the 2008 Proposed Physician Fee Schedule, to revise several of

the performance standards and add new performance standards. 197

The most significant change in the IDTF performance standard is that CMS
is proposing to add a new performance standard requiring the IDTF to certify that
it "[d]oes not share space, equipment, or staff or sublease its operations to

another individual or organization."
198 CMS has stated that the purpose of this

standard is to ensure that the operations of an IDTF are separate and distinct from
the operations of other entities.

199 CMS has also stated that shared facility
arrangements raise concerns under Stark and Anti-Kickback. If adopted, this

standard would eliminate the ability of an IDTF to enter into a sublease
arrangement with a physician practice, hospital, or other entity.

4. "Per Click" Payments.—Section 1877(e)(1) of the Act provides an
exception to the prohibition ofphysician referrals for space and equipment leases

provided certain requirements are met.
200 The requirements, contained at

sections 41 1 .357(a) and (b), are that the lease be "commercially reasonable even

if no referrals were made between the parties" and that the rental charges be "set
in advance, [be] consistent with fair market value, and . . . not be determined in

a manner that takes into account the volume or value of any referrals or other
business generated between the parties."

201

193. See id. at 66,306. CMS noted that because it did not make a specific proposal with regard
to the in-office ancillary exception, but merely solicited comments, any revisions to the exception

would be accomplished through future rulemaking with provisions for public comment.

194. Id. at 38,169.

195. Ctrs. for Medicare & Medicaid Servs., Dep't Health &Human Servs., The CMS
Quarterly Provider Update (Jan. 2007), http://www.cms.hhs.gov/quarterlyproviderupdates/

downloads/January07whatsnew.pdf.

196. See, e.g., Ctrs. for Medicare & Medicaid Servs., Dep't Health & Human Servs.,
CMS Rescinds Transmittal 1 87 on IndependentDiagnosticTestingFacility (2007), http://
www.medicareupdate.typepad.com/medicare_update/2007/02/cms_rescinds_tr.htm.

197. Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg. at 66,285.

198. Id. at 66,290.

199. See id. at 66,290-93.

200. 42 C.F.R. § 41 1.357(a)-(b) (2007).

201. Id.



1 104 INDIANA LAW REVIEW [Vol. 41:1081

In the 2001 Stark Phase I final rule, CMS stated:

[W]e are permitting time-based or unit-of-service-based payments, even

when the physician receiving the payment has generated the payment
through a DHS referral. We have reviewed the legislative history with
respect to the exception for space and equipment leases and concluded

that the Congress intended that the time-based or unit-of-service-based

payments be protected, so long as the payment per unit is at fair market

value at inception and does not subsequently change during the lease

term in any manner that takes into account DHS referrals. 202

In a reversal of this statement in the 2001 Stark Phase I final rule where CMS
opened the door to use unit of service or "per click" payments, in the 2008

Proposed Physician Fee Schedule, CMS proposed that "space and equipment
leases may not include unit-of-service-based payments to a physician lessor [(or
entity in which the physician is an investor)] for services rendered by an entity

lessee to patients who are referred by a physician lessor ... to the entity."203

CMS noted its concern that such payments are potentially abusive when the
physician-lessor is paid every time he/she makes a referral to that location for use
of the equipment.

204 CMS believes that in such a situation, the physician has an
incentive to profit from referring a high volume of patients to the lessee.

205

If finalized, this prohibition would adversely affect most equipment leasing
arrangements paid on a "per click" basis where the lessor is a physician or an

entity that has physician ownership. This prohibition would also affect

equipment leasing companies with physician ownership and management
companies that manage physician-owned companies that provide equipment on
a per-use basis. In addition to prohibiting the use of per click payments to

physician-owned leasing entities, CMS is soliciting comments on whether it
should also prohibit per click payments by a physician to an entity from which

the physician leases space or equipment if that entity refers patients to the leasing

physician.
206

5. Services Furnished "Under Arrangements."—The Stark regulations

202. Phase I, supra note 12, at 876.

203. Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg. 38, 1 83.

Although the extent Stark exceptions for space and equipment leases currently permit "per click"

lease payments, "per click" lease payments do not satisfy the requirements of the corresponding

space and equipment rental safe harbors under the federal anti-kickback statute. Id.

204. Id.

205. Id.

206. See Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg.

66,222, 66,306 (Nov. 27, 2007) (to be codified at scattered sections of 42 C.F.R. pt. 409). CMS
noted that it would not finalize any of the proposed changes regarding per click payments in the

final rule due to the number of comments received and the significance of the proposed changes.

Id. However, CMS noted that it had sufficient comments to finalize the revisions at a later date
with no new notice and comment period and intends to finalize a rule at a later date regarding "per

click" payments. Id.



2008] HEALTH LAW 1 105

prohibit a physician from making referrals for DHS to an entity with which the
physician has a financial relationship and prohibits the entity from billing

Medicare for such DHS unless an exception applies.207 In an "under
arrangements" relationship an outside supplier (usually a physician/hospitaljoint

venture) furnishes the services and the hospital bills for the services, thus the

outside supplier is not an "entity" for purposes of the Stark Law. This is because

the Stark regulations narrowly defines "entity" to mean the entity that submits a
claim to the Medicare program.

208
In an "under arrangements" relationship, the

only entity submitting a claim to Medicare is the hospital.

CMS has expressed concern with these types of "under arrangements"
relationship with physician-owned entities for a number ofreasons including that
these arrangements (1) encourage overutilization of services; (2) have no

legitimate purpose other than to allow referring physicians to make money on
referrals; (3) involve services previously provided in the hospital and which

could continue to be provided by the hospital; and (4) the services are now
furnished in less medically intensive setting than a hospital and billed at the

higher HOPPS rates.209

Likely due, at least in part, to the recent Medicare payment reductions for

imaging services performed in non-hospital settings and surgical services

performed in ambulatory surgery centers, "under arrangements" relationships

have been proliferating. In an attempt to prohibit these types of relationships,

CMS, in the 2008 Proposed Physician Fee Schedule proposed to expand the
definition of entity to include the person or entity that performs the Stark DHS,
as well as the person or entity that submits claims or causes claims to be

submitted to Medicare for the DHS.210 The proposed revision to the definition
of "entity" would essentially bar referring physicians from participating in joint
ventures that provide services under arrangements to hospitals or others. In the

2008 Proposed Physician Fee Schedule, CMS also solicited comments on a
MedPac proposal to prohibit entities in which there is physician investment and
that derive a "substantial portion of their revenue" from a DHS entity from
providing equipment or services to imaging centers and other providers of

DHS.211 If implemented, physician-owned entities may be prohibited from
providing equipment or services to any entity that furnishes DHS.212

207. Mat 38,186.
208. Id. at 38,224.

209. Mat 38,186.
210. Mat 38,187.
211. Id.

212. CMS noted that it would not finalize any of the proposed changes regarding "under
arrangements" relationships in the final rule due to the number of comments received and the

significance of the proposed changes. Id. However, CMS noted that it had sufficient comments
to finalize the revisions at a later date with no new notice and comment period and intends to

finalize a rule at a later date regarding "under arrangements" relationships. Id.



1106 INDIANA LAW REVIEW [Vol. 41:1081

B. Proposed Changes to LTCH Payments

CMS has long been concerned with the close referral relationships between
acute care hospitals and long term acute care hospitals ("LTCHs").

213 LTCHs are
defined as hospitals that have an average Medicare inpatient length of stay

greater than twenty-five days.
214 The concern regarding these referrals prompted

the creation of a special payment provision, often called the 25% rule, which
allowed co-located hospitals, hospitals within hospitals, and satellite LTCHs to
admit up to 25% of their patients from the host hospital and receive payment
under the LTCH prospective payment system.215 If the limit was violated, the
payment for all cases from the host hospital are adjusted to the lower of the

amount payable under the LTCH prospective payment system or the equivalent
of what Medicare would pay under the inpatient prospective payment system.

216

CMS is proposing changes to the 25% rule. CMS now proposes to extend the
payment adjustment to almost all LTCHs for which more than 25% of discharged
patients were admitted from a particular hospital regardless of whether it is co-

located.
217

IV. Quality

Section 101 of the Tax Relief and Health Care Act of 2006 ("TRHCA")
required the Secretary to implement a system for the reporting by eligible
professionals of data on certain quality measures.

218 Under this mandate, CMS
created the Physician Quality Reporting Initiative ("PQRI") which establishes a

financial incentive for eligible professionals (defined as physicians, practitioners,

and therapists) to participate in a voluntary quality-reporting program.
219

Eligible

professionals who choose to participate and successfully report on a designated
set of quality measures for services paid under the Medicare Physician Fee

Schedule and provided between July 1 and December 3 1 , 2007, may earn a bonus
payment of 1.5% of their charges during that period, subject to a cap.

220

The statutory description of satisfactory reporting depends on how many
quality measures are applicable to the services furnished by the eligible
professional during the entire period of July 1, 2007 to December 31, 2007.

221

If there are no more than three quality measures applicable to the services
provided by the eligible professional, then each measure must be reported for at

213. Prospective Payment System for Long-Term Care Hospitals, 72 Fed. Reg. 4776, 4813

(Feb. 1, 2007) (to be codified at 42 C.F.R. pts. 412 & 413).
214. See id.

215. See id.

216. See id.

217. Id.

218. Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, § 101, 120 Stat. 2922,

2975-81.

219. Id.

220. Id. at 2977-78.

221. Id. at 2978.



2008] HEALTH LAW 1 107

least 80% of the cases in which the measure was reportable.222 If there are four
or more quality measures applicable to the services provided by the eligible
professional, then at least three measures, selected by the eligible professional,

must be reported for at least 80% of the cases in which measure was
reportable.

223

Eligible professionals select the quality measures that are applicable to their

practices. If an eligible professional submits data for a quality measure, then that

measure is presumed to be applicable for the purposes ofdetermining satisfactory

reporting.
224 CMS recommends that eligible professionals report on every quality

measure that is applicable to their patient populations to: (1) increase the

likelihood that they will reach the 80% satisfactory reporting requirement for the
requisite number of measures; and (2) increase the likelihood that they will not
be affected by the bonus payment cap.

225

Participating eligible professionals who successfully report as prescribed by
TRHCA Section 101 may earn a 1.5% bonus, subject to a cap.226 The bonus will
apply to allowed charges for all covered professional services, not just those

charges associated with reported quality measures.
227 The term "allowed

charges" refers to total charges, including the beneficiary deductible and

copayment, not just the 80% paid by Medicare or the portion covered by
Medicare where Medicare is the secondary payor.

228

A payment cap that would reduce the potential bonus below 1 .5% of allowed
charges may apply in situations where an eligible professional reports relatively
few instances of quality measure data.

229
Eligible professional's caps are

calculated by multiplying: (1) their total instances of reporting quality data for

all measures (not limited only to measures meeting the 80% threshold), by (2) a
constant of 300%, and by (3) the national average per measure payment
amount.

230
The national average per measure payment is one value for all

measures and all participants that is calculated by dividing: (1) the total amount
of allowed charges under the Physician Fee Schedule for all covered professional

services furnished during the reporting period on claims for which quality

measures were reported by all participants in the program by (2) the total number
of instances for which data were reported by all participants in the program for
all measures during the reporting period.

231

222. Id.

223. Id.

224. Mat 2979.
225

.

Proposed Revisions to Payment Policies Under the Physician Fee Schedule, 72 Fed. Reg.

38,210.

226. Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, § 101, 120 Stat. 2922,

2977-78 (to be codified at 42 U.S.C. § 1395).

227. Id. at 2978.

228. Id.

229. Id.

230. Id.

231. Id.



1 108 INDIANA LAW REVIEW [Vol. 41 : 1081

CMS will do sampling to test the reporting.232 CMS plans to focus on
situations where eligible professionals have successfully reported fewer than

three quality measures.
233

If CMS finds that eligible professionals who have
reported fewer than three quality measures have not reported additional measures

that are also applicable to the services they furnished during the reporting period,

then CMS cannot pay those eligible professionals the bonus incentive payment.234

V. Peer Review and Credentialing: JCAHO Standard MS. 1.20

The Joint Commission on Accreditation of Healthcare Organizations

("JCAHO") revised its Hospital Accreditation Standards 2007 ("Revised
Standards") to include three new concepts.235 First, organizations must now
incorporate into their bylaws six new areas of general competency in order to
comply with MS. 1 .20. The six new areas in which practitioners are expected to
be competent are: (1) patient care that is compassionate, appropriate, and

effective for the promotion of health, prevention of illness, treatment of disease,

and care at the end of life, (2) knowledge of established and evolving biomedical,

clinical and social sciences, and the application of that knowledge to patient care

and education of others; (3) use of scientific evidence and methods to investigate,

evaluate, and improve patient care practices; (4) interpersonal and

communication skills that enable them to establish and maintain professional
relationships with patients, families and other members of health care teams; (5)
behaviors that reflect a commitment to continuous professional development,
ethical practice, and understanding and sensitivity to diversity, and a responsible

attitude toward their patients, their profession and society; and (6) an

understanding of both the context and systems in which health care is provided

and the ability to apply this knowledge to improve and optimize health care.
236

The additional two concepts established by the revised standards require the
medical staff to focus practitioner evaluations on the individual's professional

performance and to evaluate practitioners on an ongoing basis, rather than

waiting for reappointment to the medical staff.

Additionally, JCAHO made significant revisions to Standard MS. 1.20
pertaining to medical staff bylaws, regulations, and policies.

237 The revisions
were intended to support and reinforce the relationship between the medical staff

and the governing body.
238 The revised MS. 1.20 contains thirty-three discrete

items that must be incorporated in an accredited hospital's medical staff

232. Id. at 2979.

233. Id. at 2978.

234. Id.

235. See generally KATHY L. POPPITT, CREDENTIALS AND PEER REVIEW CHALLENGES AND

Strategies (2008).

236. Id.

237. The revisions to MS. 1 .20 are effective July 1 , 2009. The text of MS. 1 .20 can be found

at http://www.jcrinc.com/fpdf/pubs/pdfs/JCReqs/JCP-09-07-S3.pdf.

238. Id.



2008] HEALTH LAW 1 109

bylaws.
239 The revised MS. 1.20 "addresses situations in which a medical staff

believes that its medical staff executive committee is not [adequately]

representing its views . . . [regarding] patient safety and quality of care."
240

"[T]he medical staffbylaws must [now] indicate what authority the medical staff

has delegated to the medical staff executive committee, and how [such] authority
[can be] delegated and removed."

241 The revisions state "that the medical staff
has the ability to adopt medical staff bylaws, rules and regulations, and policies

and to propose them directly to the governing body, even if the subject matter

had been delegated to the medical staff executive committee."
242

It is important to note that since the JCAHO adopted the revisions to MS.
1 .20, there has been significant criticism of the new standards leading to the
appointment of a JCAHO task force that will undertake an investigation of the
revisions.

243

VI. Changes to the Hospital Conditions of Participation, Informed
Consent Guidelines, and Hospital Discharge Requirements

A. Hospital Conditions ofParticipation

On November 27, 2006, CMS issued a final rule revising certain
requirements of the hospital conditions of participation ("CoPs").

244 The
revisions made changes to the hospital CoPs for completion of history and
physical examination, authentication of verbal orders, securing medication, and

completion of postanesthesia evaluations.
245

First, the changes regarding the completion of the history and physical

examination are contained in the medical staff CoP located at 42 C.F.R. §
482.22(c)(5). The revised requirement expands the timeframe for completion of
the history and physical examination to "no more than [thirty] days before or
[twenty-four] hours after admission," and documentation must be placed in the

patient's medical record within twenty-four hours of admission.
246 When a

history and physical examination is recorded within thirty days before admission,

the hospital must ensure that an updated medical record entry documenting an

examination for any changes in the patient's condition is completed and

239. Id.

240. Id.

241. Id.

242. Id.

243. The task force must report its findings at the end of February 2008. News Release, Joint

Comm'n, Joint Commission Announces Task Force on Implementation ofMS. 1.20 (Jan. 3, 2008),

http://www.jointcomnMssion.org/NewsRoorn/NewsReleases/nr_l_3_08.htm.

244. Hospital Conditions of Participation: Requirements for History and Physical

Examinations: Authentication of Verbal Orders; Securing Medications; and Postanesthesia

Evaluations, 71 Fed. Reg. 68,672 (Nov. 27, 2006) (codified at 42 C.F.R. pt. 482).

245. Mat 68,672.
246. 42 C.F.R. § 482.22(c)(5) (2008).



1110 INDIANA LAW REVIEW [Vol. 41:1081

documented in the patient's medical record within twenty-four hours after

admission.
247

Additionally, the requirement no longer requires that practitioners

must be granted the privilege to conduct a medical history and physical

examination by the medical staff, rather the individual completing the medical

history and physical examination must be qualified to do so "in accordance with

[s]tate law and hospital policy."
248

Second, the changes regarding the authentication of verbal orders are

contained in the nursing services CoP249 and the medical record services CoP.250

The changes emphasize that hospitals must continue to prohibit the routine use
of verbal orders and that verbal orders only be accepted when authorized "by
hospital policy and procedures consistent with [fjederal and [s]tate law."

251

Additionally, the time must now be noted in all patient medical record entries in
addition to the requirements that the entry be legible, complete, dated, and

authenticated by the person for providing or evaluation the service provided.
252

A temporary exception to the requirement that all orders, including verbal orders,
be dated, timed, and authenticated by the ordering practitioner is permitted.

253

For a period of five years from the effective date of the final rule, verbal orders

will not need to be signed by the ordering practitioner, but could be authenticated

by another practitioner responsible for the care of the patient.
254

Additionally,

"[a]ll verbal orders must be authenticated based [on] [fjederal and [s]tate law.

If there is no [s]tate law that designates a specific timeframe . .
. ,

[then] verbal

orders must be authenticated within [forty-eight] hours."
255

Third, the changes regarding the securing of medication are contained in the

pharmaceutical services CoP.
256

"All drugs . . . must be kept in . . . secure area[s]

and locked when appropriate."257 This change provides hospitals with greater
flexibility in the storage of drugs and biologicals as the previous CoP required
that all drugs and biologicals be kept in a locked storage area. However, all

scheduled drugs (II, III, IV, and V) "must be . . . locked within a secure area,"
and "[o]nly authorized personnel may have access to locked areas."258

Finally, the changes regarding the completion ofpost-anesthesia evaluations

are contained in the anesthesia services CoP.
259 The revision provides that a

post-anesthesia evaluation for inpatients may be completed and documented by

247. Id.

248. Id.

249. Id. § 482.23(c)(2)(i)-(ii).

250. Id. §482.24(c)(l)(i).

251. Id. § 482.23(c)(2)(i)-(ii).

252. Id. § 482.24(c)(1).

253. Id. §482.24(c)(l)(ii).

254. Id.

255. Id. §482.24(c)(l)(iii).

256. Id. § 482.25(b)(2).

257. Id. § 482.25(b)(2)(i).

258. 42 C.F.R. § 482.25(b)(2)(ii)-(iii) (2007).

259. 42 C.F.R. § 482.52(b)(3) (2008).



2008] HEALTH LAW 1111

any individual qualified to administer anesthesia instead of only by the individual

that administered the anesthesia.
260

B. Hospital Informed Consent Guidelines

The requirements related to informed consent for hospitals are found in the
Patient's Rights CoP,

261
the medical records CoP,

262
and the surgical services

CoP.
263 On April 13, 2007, CMS issued new interpretative guidelines on

informed consent in a letter to state survey agency directors.
264 The interpretative

guidelines discuss the applicable requirements for each CoP relating to informed
decision-making and informed consent and the survey procedure to be used to

determine compliance for that CoP.
265

Specifically, the interpretative guidelines modify or supplement the

following areas. "Tag A-0049 ... in the Patients' Rights CoP discusses the
patient' s or patient' s representative' s right to make informed decisions regarding
the patient's care."

266
"Tag A-0238 ... in the medical records CoP discusses the

requirement that the hospital must ensure that patient medical records contain

properly executed informed consent forms for procedures or treatments specified

by the hospital [m]edical [s]taff, or by [f]ederal or [s]tate law if applicable, to

require written patient consent."
267

"Tag A-0392 ... in the [s]urgical [sjervices
CoP discusses the requirement that the hospital must ensure that a properly
executed informed consent form is in the patient' s medical record before surgery,

except in emergencies."
268

C. Hospital Discharge Requirements

On November 27, 2006, CMS issued a final rule providing new requirements
for hospital discharge notices under Medicare and the Medicare Advantage

("MA") program.269 The final rule contains requirements on how hospitals must
notify Medicare beneficiaries who are inpatients about their discharge rights.270

Notice regarding hospital discharge "is required . . . for . . . Medicare

260. Id.

261. 42 C.F.R. § 482.13(b)(2) (2007).

262. 42 C.F.R. § 482.24(c)(2)(v) (2008).

263. Id. § 482.51(b)(2).

264. Memorandum from the Survey & Certification Group of the Ctr. for Medicaid and State
Operations to State Survey Agency Dirs., Revisions to the Hospital Interpretive Guidelines for

Informed Consent (Apr. 13, 2007), http://www.cms.hhs.gov/SurveyCertificationGenInfo/

downloads/scletter07- 1 7.pdf.

265. See generally id.

266. Id. at I.

267. Id.

268. Id.

269. Medicare Program; Notification of Hospital Discharge Appeal Rights, 71 Fed. Reg.

68,708 (Nov. 27, 2006) (codified at 42 C.F.R. pts. 405, 422 & 489).
270. Id.



1112 INDIANA LAW REVIEW [Vol. 41:1081

beneficiaries and for beneficiaries enrolled in . . . MA plans and other Medicare
health plans subject to MA regulations."271

Hospitals are required to use "a revised version of the Important Message

from Medicare ('IM') ... to explain the discharge rights."
272 The IM will include

"a statement of patients' rights, information about when a beneficiary will and
will not be liable for charges for continued stay . . . . , [and] a more detailed
description of . . . appeal rights."

273

Hospitals must issue the IM within [two] days of admission, and must
obtain the signature of the [Medicare] beneficiary or his or her

representative. Hospitals [must] also deliver a copy of the signed notice

prior to discharge, but not more than [two] days before the discharge.
For beneficiaries [that] request an appeal, the hospital [must] deliver a

more detailed notice.
274

VII. Antitrust

In a unanimous ruling, the Federal Trade Commission ("FTC") found that
Evanston Northwestern Healthcare Corp. ("ENH") substantially lessened
competition in violation of section 7 of the Clayton Act when it acquired
Highland Park Hospital ("HPH") resulting in higher prices for insurers and
consumers for general acute care inpatient services, but declined to order

divestiture of the acquired hospital.
275 The FTC instead ordered ENH to create

two independent negotiating teams, one for ENH and one for HPH, to negotiate
separately and independently with purchasers of inpatient hospital services.

276

The FTC did state in its opinion that

[divestiture is the preferred remedy for challenges to unlawful mergers,
regardless of whether the challenge occurs before or after

consummation. Thus, where it is relatively clear that the unwinding of

a hospital merger would be unlikely to involve substantial costs, all else
being equal, the Commission likely would select divestiture as the
remedy.

277

VIII. DMEPOS Competitive Bidding Program

On April 2, 2007, CMS issued a final rule establishing a competitive bidding
process to set Medicare payment amounts for certain items of durable medical

271. Id.

272. Id.

273. Id. at 68,710-11.

274. Id. at 68,708.

275. See In re Evanston Northwestern Healthcare Corp., FTC No. 9315, 2007 WL 2286195
(Aug. 6, 2007).

276. Id.

277. Id.



2008] HEALTH LAW 1113

equipment, prosthetics, orthotics, and supplies ("DMEPOS")-
278 The final rule

requires suppliers to be successful bidders and meet program standards to be

selected to supply DMEPOS items to Medicare beneficiaries in ten competitive
bidding areas ("CBAs").

279 With few exceptions, suppliers that do not bid or are

unsuccessful in their bids will not be able to bill Medicare for items in the

CBAs.280

CMS will phase in competitive bidding by DMEPOs product category.281

For 2007, the items include: (1) oxygen supplies and equipment; (2) standard

power wheelchairs, scooters, and related accessories; (3) complex rehabilitative

power wheelchairs and related accessories; (4) mail order diabetic supplies; (5)
enteral nutrients, equipment, and supplies; (6) continuous positive airway

pressure devices, respiratory assist devices, and related supplies and accessories;

(7) hospital beds and related supplies; (8) negative pressure wound therapy
pumps and related supplies and accessories; (9) walkers and related accessories;
and (10) support surfaces (group two mattresses and overlays) in Miami and San
Juan only.

282

Competitive bidding will impact Medicare DMEPOs pricing. The bids will
be used to set a single payment amount for each item in the particular CBA.283

Payment under the competitive bidding process was mandated by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA")284

and will be effective April 1, 2008. CMS expects that the competitive bidding
process will save the Medicare program $1 billion annually once fully

implemented.
285

DC. Food and Drug Law

The Institute of Medicine ('TOM") of the National Academies issued a
report, The Future ofDrug Safety: Action Steps for Congress, which includes
recommendations for strengthening the FDA's post-market drug surveillance
capabilities.

286 Among the recommendations are expanding the agency's
regulatory authority, additional labeling requirements for new drugs, and
restrictions on direct-to-consumer advertising.

287
In response to the IOM report,

278. Medicare Program; Competitive Acquisition, 72 Fed. Reg. 17,992 (Apr. 10, 2007) (to be

codified at 42 C.F.R. pts. 41 1 & 414).
279. See id. at 18,010.

280. Id. at 18,006-08.

281. Mat 17,992.
282. Mat 18,021.
283. Mat 17,998.
284. Mat 18,070.
285. See id. at 18,080.

286. Inst, of Med., Report Brief—The Future of Drug Safety: Action Steps for
CONGRESS (2006), http://www.iom.edU/Object.File/Master/37/331/l 1750_report_brief_Congress.

pdf.

287. Id.



1 1 14 INDIANA LAW REVIEW [Vol. 41:1081

the FDA issued additional plans for post-market drug monitoring, including a
pilot program to profile the safety of newly approved drugs.

288

On December 14, 2006, the FDA issued two proposed rules which would
significantly impact the area of food and drug law regarding investigational

drugs. The first proposed rule deals with expanded access for investigational

drugs for treatment use.
289 Under the proposed rule, "expanded access to

investigational drugs . . . would be available to individual patients, including in
emergencies; intermediate-size patient populations; and larger populations under

a treatment protocol or treatment investigational new drug application."290 The
intent of the proposed rule is "to improve access to investigational drugs for

patients with serious or immediately life-threatening diseases or conditions, who
lack other" treatment options.

291 The second proposed rule deals with charging
for investigational drugs.

292
In the proposed rule, the "FDA is proposing to revise

the . . . charging regulation to clarify the circumstances in which charging for an

investigational drug in a clinical trial is appropriate, to set forth criteria for

charging for an investigational drug for the different types of expanded access"

to the investigational drugs in the first proposed rule discussed above, "and to

clarify what costs can be recovered for an investigational drug."
293

On May 9, 2007, the Senate passed the Food and Drug Administration
Revitalization Act reauthorizing the user fee programs and adding sections to

reform the FDA' s post-market drug surveillance function.294 The bill requires the
Secretary to assess and collect fees for review of direct-to-consumer television

advertisements for prescription drugs.
295 The bill also increases the civil

monetary penalties for companies that fail to comply with FDA directives.296

288

.

FDA, The Future ofDrug Safety—Promotingand ProtectingtheHealthofthe
Public: FDA's Response to the Institute of Medicine's 2006 Report (2007).

289. Expanded Access to Investigational Drugs for Treatment Use, 7 1 Fed. Reg. 75, 147 (Dec.

14, 2006) (to be codified at 21 C.F.R. pt. 312).

290. Mat 75,147.
291. Id.

292. Charging for Investigational Drugs, 71 Fed. Reg. 75,168 (Dec. 14, 2006) (to be codified

at 21 C.F.R. pt. 312).

293. Id.

294. Food and Drug Administration Revitalization Act, S. 1082, 1 10th Cong. (2007).

295. Id.

296. Id.